STEEL STRIPS WHEEL LTD.

STEEL STRIPS WHEEL LTD.

Steel Strips Wheels Limited (SSWL) designs, manufactures, and sells automotive steel wheels in India and internationally. It offers wheels for two and three wheelers, passenger cars, multi utility vehicles, tractors, trucks, and off road vehicles.

Capacity overview

Units	End market	Capacity (mn)	Key clients
Dappar, Punjab	Passenger car / MUV’s, 2& 3w	7.25	Major OEMs
Dappar, Punjab	Commercial vehicles / Tractor	1.75	Major domestic OEMs
Oragadam, Chennai	Passenger cars / MUVs	6	Major OEMs
Oragadam, Chennai	Commercial vehicles / Truck	1.2	Daimler, Volvo Eicher,  Mann Trucks, Scania
Jamshedpur, Jharkhand	Commercial vehicles / Truck	1.6	Tata motors, Ashok Leyland
Mehsana, Gujarat	Alloy wheels (Passenger cars)	1.5	Maruti Suzuki, Ford India, M&M, Renault Nissan

 * Highlighted capacities have recently been added

SSWL is an interesting growth stock with the company having consistently deliveredrobust financial performance, healthy clientele and a strong presence in the automotive steel wheel rim industry with large wallet share from leading original equipment manufacturers (OEMs).

Key Investment arguments

Recent capacity expansion – a game changer for FY19

The management is focusing on commercial vehicle exports and foraying into the high margin alloy wheel segment to drive the next leg of growth.

Brownfield expansion at Chennai to boost growth- New production lines for steel wheel rims are being set up to meet the growing demand from commercial vehicle customers down south as well as for driving exports from Chennai. The new plant has added 1.2 million wheels capacity to the already existing 1.8 million wheels capacity. Total capacity of the truck wheel segment now stands at 3 million wheels, which makes SSWL the largest truck steel wheel maker in India.The new truck plant has already reached 100% utilization in March 2018, registered highest sales ever.

Greenfield alloy wheel plant in Mehsana to improve profitability-With its Gujarat foray, SSWL is breaking ground in alloy wheel production for the first time with an initial capacity of 1.5 million wheels; which has been has commenced production in Q4FY18. The market share for steel rims has fallen to 75 percent from 85 percent over the last couple of years in favor of alloy wheels. Earlier, alloy wheels used to be part of premium vehicles but over the years they have become popular for the mid-size segment as well. SSWL had an insignificant presence in the alloy wheel segment and now with this market growing, the company sees a huge opportunity.The management expects to generate operating margin of over 20 percent from alloy wheels as compared to 13-14 percent that they generate from steel rims. Till March 2018 Mehsana plant has already bagged orders from 6 OEMs and the company expects the plant to reach 75% utilization in FY19.

Targeting exports; new orders flowing in

The management has been targeting the export market aggressively and has been receiving orders from Europe, the UK and the US. The company has established itself as a leading supplier of caravan steel wheels in the European region. It has been able to make inroads in the highly competitive UK aftermarket as well. SSWL currently has a very strong order book from export markets, including orders from esteemed German OEM BMW.

Healthy order book provides revenue visibility

The demand across segments, especially CVs, remain robust. The new truck wheel plant in Chennai has potential to export commercial wheel of 100,000 wheels per month. The current order book of this plant stands at around 95,000 wheels per month. The capacity utilization of the plant is expected to increase further in Q4 due to 90% utilization of Chennai truck plant.

OEMs	Order size (wheels per month)
Ashok Leyland	50k
Tata Motors	10k
Daimler	8-10k
Export	20K
Aftermarket	5K

Strong long-term financial performance

Historically, the company has been able to deliver strong financial performance. Net revenue posted a healthy 12.5 percent CAGR over FY11-17 and EBITDA also mirrored the strong revenue performance of 11.1 percent CAGR.

The company has a very healthy EBITDA margin which averages around 11 percent over the same period. In FY16 and FY17, the company has been able to grow its margin to 12.3 percent, because of the fall in raw material prices as a percentage of net revenues. In fact, despite the rise in RM prices in FY18, the company has been able to arrest the fall in margins through effective cost measures and maintained margins above 11 percent.

Capacity expansion to mirror future growth

On the back of strong demand from CV OEMs and increase in capacity utilization of all the plants, the company is expected to register CAGR of 23% in Net sales over next couple of years (i.e. FY18e-20e). During the same time, tilt of product mix in favor of high-margin alloy wheels is likely to augment EBITDA and net margins.

Return ratios to expand due to higher profitability and asset turns

Better profitability to improve the cash accruals and hence reduced leverage going forward. We expect the company will be able to repay its term loans borrowed to expand the capacities. This should further reduce the interest cost and improving net profit significantly. We expect net margins to improve from 5.3% in FY18e to 7.5% in FY20e. Further, asset turns to improve significantly as for last 6 years company has been into capex mode and thus reflecting under-utilized asset capacities. In coming years, we expect capacities to be optimally utilized and asset turnover ratio can reach to 1.4x in FY20e from 0.9x currently. Both these will be driving higher return ratios and RoE in FY20e would potentially be reaching more than 20% in line with other peers.

SSWL (FY20e)

* Bubble size represents total debt size

Peer benchmarking analysis

During LTM, SSWL has reported higher EBITDA margin as compared to most of the domestic peers such as Minda Ind (MINDA), Enkei Wheels (ENK) and Wheel India (WHL). However, margins have fallen short while comparing it with global peers like Borbet (BOR) and Uniwheels (UNI).

Comparing revenue growth, except MINDA and UNI, SSWL managed to grow at decent pace. In last couple of years, MINDA has primarily grown inorganically.

* Bubble size represents revenue size

On the margin front, despite higher Gross and EBITDA margin as compared to peers, SSWL is not able to report higher net margin primarily due to higher financial leverage and thus, higher interest cost.

Outlook and Valuation

The outlook for SSWL remains favorable from both growth and operational efficiency perspective. On top-line front, the robust demand from CVs and new orders for alloy wheels will be key areas of focus. While the change in product mix in favor of alloy wheels and CVs, will result in better margins. Higher return ratios will potentially drive valuations higher in line with other peers such as MINDA, WHL.

At current market price of INR 1323, the stock is trading at 24x FY18e EPS, 16x FY19E EPS and 11x FY20E EPS. We believe the stock can be valued at 15x FY20E EPS of INR 120 given 20%+ growth rates and return ratios. One can Buy the stock with a target price of INR 1800 indicating 34% upside from CMP.

Symbol	Net margin	Asset Turnover	Leverage	RoE%	P/S	P/E
SSWL	5.3%	0.87	3.2x	14.8%	1.4x	27.3x
WHL	2.8%	1.63	2.9x	13.3%	1.2x	43.4x
ENK	1.5%	1.73	7.4x	19.6%	1.3x	87.5x
MINDA	5.7%	1.78	2.1x	21.1%	2.4x	42.1x
BOR	6.4%	1.72	1.9x	20.8%	n/a	n/a
UNI	11.7%	1.30	1.6x	24.5%	1.8x	15.4x
Average	5.6%	1.63	3.2x	19.9%	1.7x	47.1x

Source: Capital IQ

                                                                                                                                   

Appendix

Peer list description
Sr. No.	Company Name	Symbol	Headquarter	Total Revenue INR mn - LTM	Business Description
1	Wheels India Limited	WHL	India	21,729	Wheels India Limited manufactures and sells automotive components in India. The company offers steel wheels for use in heavy and light vehicles, as well as for agricultural applications; off road construction wheels, wire wheels, and forged aluminum wheels; air suspension systems for wide range of vehicle applications; and windmill components, and fabricated and machined components. It also provides parts and accessories for machinery/equipment that are used in construction and mining industries. The company also exports its products. Wheels India Limited was incorporated in 1960 and is based in Chennai, India.
2	Enkei Wheels (India) Limited	ENK	India	4,474	Enkei Wheels (India) Limited manufactures and sells aluminum alloy wheels for use in the automobile industry in India. It offers aluminum alloy wheels for two wheelers and four wheelers. The company was incorporated in 2009 and is based in Pune, India. Enkei Wheels (India) Limited is a subsidiary of Enkei Corporation.
3	Minda Industries Limited	MINDA	India	40,889	Minda Industries Limited, together with its subsidiaries, designs, develops, manufactures, and sells auto components, including auto electrical parts and its accessories in India and internationally. It also offers blow molding systems, aluminum castings, alloy wheels, hoses, air filtration systems and canisters, speakers, printed circuit boards and box build assemblies, driving assistance products and systems, and RPAS. Minda Industries Limited primarily sells its products to original equipment manufacturers and replacement markets. The company was founded in 1958 and is headquartered in Gurgaon, India. Minda Industries Limited is a subsidiary of N K Minda Group.
4	BORBET GmbH	BOR	Germany	74,615	BORBET GmbH designs, manufactures, and sells lightweight alloy wheels for the automobile industry. The company offers premium, sports, classic, and commercial alloy wheels; wheel configurators and 3D configurators; and accessories, merchandise, and special offers. Its products are available online, as well as in specialty retail stores in Germany and internationally. The company was founded in 1881 and is headquartered in Hallenberg-Hesborn, Germany with subsidiaries and locations in Medebach, Neuching, Solingen, Kodersdorf, and Bad Langensalza, Germany; Ranshofen-Braunau, Austria; Port Elizabeth, South Africa; and Auburn, Alabama.
5	UNIWHEELS AG	UNI	Germany	41,454	UNIWHEELS AG develops, produces, and sells alloy wheels for the automotive and accessory markets. The company provides its wheels under the ATS, Rial, Alutec, and Anzio brands to tire and wheel retail chains, wholesalers, retailers, and car dealers. It sells its products through a network of sales channels and trade partners in approximately 30 countries worldwide. The company was formerly known as UNIWHEELS Holding (Germany) GmbH and changed its name to UNIWHEELS AG in November 2014. The company was founded in 2005 and is headquartered in Bad Durkheim, Germany. As of May 11, 2017, UNIWHEELS AG operates as a subsidiary of Superior Industries International Germany AG.